Economic forecast for Germany. Germany’s economy is adjusting to the disruption of gas deliveries from Russia and the energy price shock they caused.

Growth slowly resumes after technical recession avoided

The economy avoided a technical recession in the first quarter of 2023, with GDP reported to have stagnated. Industrial production and construction rebounded, whereas the decline in private consumption is expected to have been contained. Nevertheless, the volumes of investment and private consumption are still below pre-pandemic levels. The adjustment of supply chains for energy and other intermediate products and full order books should set the stage for a resumption of equipment investment growth in 2023. This is further supported by pressure on costs from still high, by historical standards, producer, and energy prices, which are expected to spur equipment investment aimed at increasing energy efficiency. Easing supply bottlenecks should help unwind production backlogs and support exports. With the import content of production and domestic demand projected to increase as energy-intensive industries downsize, and energy imports set to remain costlier than outside the EU, the rebound of the current account surplus is expected to remain contained. Higher building and borrowing costs are projected to weigh on construction, but high housing demand and plans to address infrastructure needs should remain supportive of the sector. Overall, real GDP is expected to increase by just 0.2% in 2023. In 2024, growth is forecast to rebound to 1.4% driven by a recovery in consumption and investment.

A tight labour market

At 45.7 million, employment was at an all-time high in late 2022. The unemployment rate reached a historic low of 2.8% in March 2023. Reported labour shortages remain high. Employment is expected to increase further, constrained mostly by labour supply rather than demand. Wage growth averaged 4.7% in 2022, remaining below consumer price inflation. In view of the tight labour market, real wage growth is expected to resume, as pay increases are shored up. With purchasing power improving, private consumption is set to continue recovering. The household saving rate is forecast to continue decreasing towards pre-pandemic levels.

Inflation to ease

HICP inflation peaked at 11.6% in October 2022, driven by the surge in energy prices and rising input costs. It decelerated steadily to 7.6% in April 2023. In 2023, the pass-through of elevated wholesale energy price growth is expected to be mitigated by the price caps on gas and electricity. Nevertheless, prices to consumers are set to remain historically high. Still rising producer costs are set to keep HICP inflation high, at a projected 6.8% in 2023. Wage growth is expected to exert some upward pressure on core inflation, notably on services. Corporate profitability has benefited from the so far moderate wage increases and the ability of firms to pass costs onto prices, hence there should be room to partly accommodate further wage growth. In 2024, inflation is projected to ease to 2.7% on the back of a decrease in energy costs.

Budget deficit and government debt return to a downward trend

The general government deficit is projected to narrow from 2.6% of GDP in 2022 to 2.3% in 2023 and to 1.2% in 2024. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 2.0% of GDP in 2023, compared with 1.2% in 2022. The Commission currently assumes the net cost of energy support measures at 0.3% of GDP in 2024. This forecast includes a deficit-increasing impact of around 1.2% of GDP for the gas and electricity price brakes in 2023 and assumes that they are phased out in 2024. Thus, only around one quarter of the EUR 200 billion (4.9% of GDP) originally set up for the energy price brakes is expected to be used under the current assumptions on the development of market prices for energy. Deficit developments in 2023 are also affected by the assumed complete phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 0.8% of GDP in 2022. Additional spending by the extra-budgetary defence fund and by the Climate and Transformation Fund is expected to support public and private investment over the forecast horizon. Government revenue benefits from higher tax collection and social security contributions, also supported by high inflation, while government expenditure growth is set to slow down as the various government support measures are phased out. The government debt-to-GDP ratio peaked at 69.3% in 2021 in the context of the pandemic. It then decreased by around 3 pps. to 66.3% at the end of 2022, also benefiting from the growth of nominal GDP. Government debt is projected to further decrease to 65.2% of GDP in 2023 and 64.1% in 2024.